From The Editor | May 5, 2016

3 Vital Considerations For Medtechs Mulling A Hospital Partnership

By Doug Roe, Chief Editor

Celgene Partners With Sutro On ADCs, Acquires Option To Buy Sutro

A new report from ZS Associates assesses the hospital partnership opportunities created by healthcare’s heighten focus on improved patient outcomes.

If you are like me, you’re probably tired of reading (or writing) about the Affordable Care Act’s (ACA) negative impact on the medtech industry. Still, while I agree with many of our readers that the shift in the healthcare ecosystem was already quietly underway before the introduction of the ACA, there is little doubt that certain components of its construct have accelerated the evolution process. 

There is a dramatic shift in how reimbursement is being paid. Today’s focus on quality outcomes has forced hospitals to change business models, moving away from the traditional pay-for-service model. Provider consolidation continues as hospitals look to directly control more of the complete patient healthcare continuum. These larger entities have gained greater buying power, but they also have more complex infrastructures to manage. The buyer has shifted, from an individual or group with longstanding direct relationships with clinicians, to sourcing groups and business-minded decision makers.

ZS Associates surveyed 85 U.S.-based hospital executives and department leaders to understand how the healthcare priorities may be changing, and what medtech can learn from that change.

Hospitals Are Adapting To New Economics

An initial look at the survey results may not be surprising. The report’s Top Priorities for Hospital Executives, over the next five years, lists respondents’ greatest concerns as cost reduction (26 percent of respondents), followed closely by quality care (25 percent), and revenue growth (22 percent). “Traditionally, to contain costs, hospitals have leaned on medtech vendors to supply its products at a lower price,” states the report.

The cost reduction metric is a bit misleading, though, and it is no longer tied simply to product price. In the report’s Cost Performance Initiatives category, maximizing performance against the Centers for Medicare & Medicaid Services (CMS) payment and quality metrics was far and away respondents’ top priority (25 percent). Driving operational efficiency was second (20 percent), and reducing the cost of goods in medtech products (17 percent) dropped to third. The rise of performance against CMS, versus reducing cost of medtech goods, represents a clear swing in hospital priorities and the methodology required to achieve them.

“Risk-based payment models force hospitals to bear the costs arising from poor outcomes that require prolonged stays or readmissions. What’s more, a hospital’s current performance against quality metrics is a factor in determining its reimbursement rates in the future. Poor outcomes today will mean lower revenues down the road,” states the ZS report.

Medtech Has A Perception Problem

The report goes on to state that, although there are opportunities for a medical device company to leverage its core competencies through a partnership with hospitals, “hospital executives have lackluster perceptions of medtech manufacturers as potential partners.” Per the report’s Perception vs. Opportunity category, half of all hospital stakeholders (50 percent) believe that medtech can help with new technology, new procedures, and treatment options. Those stakeholders are not as confident (just 35 percent) of medtech’s competency in areas such as improving efficiencies, maximizing financial performance, and enhancing performance against quality metrics.

Adding to this discouraging perception are the varied priorities of the different groups represented — responsibility levels, clinical versus administrative, and the various departments. ZS points out that there is not a unified business strategy among medtech manufacturers: “Interventional service lines such as cardiology, orthopedics, and general surgery believe that maximizing performance against risk-based payment is more important (28 percent), while central labs and radiology (14 percent) focus much less here. Central labs and radiology prefer to reduce cost through traditional means, such as decreasing cost of goods (33 percent).”

Partnership Considerations

ZS concludes its report with a list of three things medtechs should evaluate before considering a hospital partnership:

  1. Rethink your value proposition  — What outcomes do customers care about most? How can your products and services help customers perform against those outcomes? How can your product portfolio be reshaped to be even more compelling?  
    “Thinking outside of the box is essential. Consider the equipment used by nurses every day. Traditionally, a vendor would emphasize user features and its affordable price; the dialogue shifts today to the benefits in terms of reducing patient injuries, thus reducing costs,” states the ZS report.
  2. Identify and refine the key capabilities needed to deliver that value — Assess your existing portfolio; what capabilities are needed? Review your business model; should you consider risk-sharing and other payment models? If you chose a new commercial model, what are the most critical gaps in your capability? 
    DePuy’s March 2016 strategic alliance with Value Stream Partners is an example of one firm’s efforts to bolster its ability to support hospitals in delivery quality patient outcomes,” states the ZS report.
  3. Transform your go-to-market strategy — The shift to non-clinical stakeholders means it is less about technology, and more about the ability to present value-based outcomes. How can you promote the behavior changes required for these types of cost savings? How will each party share in the value that result from better outcomes? 
    “A wound care company was selling its portfolio the old-fashioned way, doctor by doctor and product by product. Recognizing that business executive had become its primary customer, the company changed its approach. It designed an integrated program of products and protocols that improves patient performance metrics, while saving money,” the ZS report states.

So, what is the next step? As ZS points out in its report, “this is not a one-size-fits-all approach.” Each medtech company must consider carefully how its products and services fit its customers’ needs. Partnering is not for everyone. Some may pursue (or continue) a category-killer approach, and dominate a narrow channel. Others may choose to be market disrupters, and produce game-changing technologies. Most of today’s medtech companies have taken a blended approach, but the opportunities to partner with providers in the new outcomes-based healthcare paradigm are enticing.

Some current approaches — like Medtronic’s Hospital Solutions business, created to improve hospital efficiencies, and Johnson & Johnson’s Outpatient Joint Replacement Program, which links DePuy’s orthopedic surgical products with customized training and education in an outpatient setting — have gained interest from both sides.

But, per ZS, “Even if a medtech firm is well-positioned to partner with a hospital or hospital system – and those providers are receptive – many medtec companies have a ways to go to develop the necessary key account management mindset to create an effective partnership. To help hospitals perform well against key quality metrics, the medtech industry must make the leap from selling products to selling outcomes.”

This conversation is not new. It has been on the table for the last few years, but as hospitals continue to grow larger, stronger – though, through consolidation, fewer – the urgency to improve relationships with them grows. Medtech has already made adjustments, through M&A, to offer broader, deeper product lines, lower product costs, and improved efficiency in the supply chain. Partnering is the natural next step in the evolution of our industry. If you haven’t, it is time to evaluate your capabilities for this possibility – time for both customer and supplier to sit on the same side of the table.